Traveling through an Indian city today is like passing
through a war-ravaged territory. Buildings are being torn down, roads are being
dug up, tracts of land are being leveled and traffic jams are everywhere as
India’s burgeoning middle class races over potholes and expressways with equal
ease to its destination every day. Such chaos should be intimidating. Yet, it is
this visible sign of activity everywhere, which is drawing potential investors
to the country.
"India has certainly firmed up in the world of business
space, forcing global businesses to sit up and take a fresh view," says Anuj
Puri, Managing Director of Trommell Crow Meghraj. "Interest in India has
significantly increased, particularly after the government relaxed Foreign
Direct Investment (FDI) norms in real estate. India is undoubtedly the flavor of
the season, more so than even last year," adds Anshuman Magazine, Managing
Director, South Asia, CB Richard Ellis (CBRE).
India’s economic growth is now around 7%, its external sector
is strong, the foreign exchange reserves are in excess of $135 billion and the
Bombay Sensitive Index (Sensex) is hovering around an all-time high of 10,000.
Driving the country up such high growth trajectory are sectors such as services,
media, retail, auto, auto components, IT and IT enabled Services (ITeS), which
are averaging over 15% year-over-year growth. These sectors are driving
consumption, including a demand for commercial and retail properties.
Consequently, real estate, with an estimated market size of $15 billion, is
booming at an annual growth rate of 30%. But this is not all. Experts estimate
that this is only the beginning and in terms of size, the sector will top the
$50 billion mark by 2008.
Understandably, predictions of such growth prospects by
independent experts and global consultants have sparked investor interest at
home and abroad. Global investors have already entered the Indian market as
foreign direct investment (FDI) investors and as foreign institutional investors
(FIIs). NRIs – who have traditionally been savers, as is reflected by their
remittances, which stand at around $33 billion – have also increased their
investment taking up India’s FDI to $5 billion and capital market investments to
If this sounds like hype, experts point out that this is just
a trickle, which could soon turn into a flood. "The interest is strong and
growing, but it could be more," says CBRE’s Magazine. He points out that some
amount of NRI interest in Indian real estate always existed, but the most
significant development now is the change in the complexion of NRI investors.
"Earlier, interest was mostly from NRIs in the Middle-East, who were often
buying residences for their families back home, but today, the interest is more
widespread, with inquiries coming in from NRIs in the US and Europe," says he.
As far as locations go, even though metros like Mumbai,
Delhi, Chennai, Kolkata, Bangalore and Hyderabad are hot favorites with
investors, the tier II cities like Pune, Jaipur and Chandigarh are also racing
ahead. In general, Bangalore, Pune, Delhi and Mumbai are popular as investment
destinations with companies, while smaller cities like Jaipur, Chandigarh,
Nasik, Cochin, Coimbatore and Kolkata have found favor with individual
investors, says Trommell, Crow Meghraj’s Puri.
The NRIs are investing either as developers or as buyers. As
developers, they are investing in the development of townships, residential and
commercial projects. As buyers, they are buying commercial or residential
properties for a variety of reasons, including personal use, gifts or
"The laws are slowly changing in favor of landlords and court
verdicts have favored landlords and there is no hassle in leasing nowadays,"
explains Chennai-based V Nagarajan, Editor of Indian Real Estate, India’s only
real estate magazine. Nagarajan and his Priya Publishing have also been holding
regular global property shows in the US and Saudi Arabia, and the next India
Property show is scheduled for May 2006 and would be held in Sunnyvale
(California), Dallas (Texas) and Edison (NJ).
Undoubtedly, acquisitions for self-possession or for renting
are equally attractive options as recent surveys show. According to a 10-city
Express Estate-India Properties survey, average residential property prices rose
by 24.2% during 2005 in Delhi, Mumbai, Kolkata, Bangalore, Chennai, Hyderabad
Chandigarh, Jaipur, Goa and Pune.
The rental returns are also in a very healthy range of 8-10
percent, which is far higher than the global average of 3-4 percent. Experts
warn that these are indicative figures only and the actual returns vary
depending on the city and locations within a city. As Rajan Sastri, Head of
Research and Advisory services, IndiaProperties.Com Pvt Ltd, says, "The yield in
India seems better than in most developed nations today. Of course, that does
not mean that in the years to come, the margins will drop. This is unlikely to
happen especially looking at the interest rates that are on the rise."
Thus, the returns are currently attractive and if the experts
are to be believed, they will continue to be high in the coming years.
Furthermore the law also allows NRIs to come in as speculators, as it does not
differentiate between the two categories of property buyers. Many developers,
however, have moved in to check investment buying in real estate and discourage
Speculators are bad for developers, as Satish Magar, Managing
Director of Magarpatta City explains, buyers in most residential complexes buy
homes that they can come back and live. They look for neighbors, families and
children with whom their families can interact and their children can play.
Hence the focus of the developer is to build communities. When speculators move
in and buy whole building blocks, they drive out genuine buyers and create
Also, speculators, who enter at the initial stages, start
offloading their purchases as the projects progress. Sometimes, this is at costs
lower than the developers themselves. Net result is that the developer is not
able to sell his property. "We don’t have a cap on the percentage of property we
sell to NRIs in a project, but when a buyer wants to buy a whole apartment
block, we become alert and stop it," says Magar.
While speculators are not popular, developers are working
hard to woo genuine NRI investors, who may buy an apartment or two for
self-occupation or for renting. As incentives developers are offering many value
added services such as finding tenants for the properties being acquired by
absentee landlords, including NRIs.
The 400-acre Magarpatta City, to be completed in 2008, is one
such project, where the developer is wooing the NRIs who are returning home
because of what Satish Magar calls the "reverse brain drain" in the IT sector as well helping find tenants for NRIs who buy an apartment or two to earn rental
Kumar Builders of Pune also follows a similar approach to
make their projects attractive to buyers, though it does not limit allocation of
property to NRIs. "It is difficult to do this (limit allocation) in cities where
the demand from NRIs is high. However, many developers have a customer
relationship strategy and they provide value added services," says Lalit Kumar
Jain, Chairman & Managing Director of the Pune-based Kumar Builders.
Interestingly, value- added tenancy services are not provided
by all builders and this is an issue that buyers need to check out prior to
purchasing a property, if they need such an assistance. As Vijay Vancheswar,
Vice President, Corporate Communications of the Delhi-based DLF clarifies, "DLF
as a developer is involved with only promoting, setting up and developing
projects across its residential, retail and commercial businesses. As of now,
the company does not engage in any formal system of identifying tenants for the
Generally, there is no bar on the real estate segments that an NRI could
invest, though there is a restriction on the acquisition of agricultural land.
Another restriction is for an NRI to purchase commercial property and run a
single-branded showroom, though there is no bar on buying just the property for
the same purpose. "To operate his single-brand showroom business on the
purchased property, the NRI will need a local partner," explains
Indiaproperties.com’ Sastri. Similarly, entering retail as a joint venture
partner or partnering a special economic zone (SEZ) could be an out of the box
idea for investment. As Kumar Builder’s Jain points out, "SEZs and retail are
new buzz words."
Sale of high-end super luxury residential projects is often
by invitation, though builders of unique theme communities may also follow this
route. "We rarely advertise. We invite a few friends and make a one-to-one
presentation and our properties get sold easily by this route," says G
Nagarajan, Director of the Chennai-based Yogasri Property Pvt Ltd, which was
involved in the marketing of Chamundeswari Build Tech’s Eagleton and Silver Oak
projects in Bangalore. Similarly, DLF has opted for this route to sell many of
its projects. "Sale-by-invitations have been performing very well. Examples
include DLF’s super luxury residential projects such as Aalias’ and the Magnolia
on its exclusive DLF Golf Course in Gurgaon. Prices of these high-end luxury
apartments, which are in excess of $1 million have had an excellent response,
comprising of NRIs and high net worth individuals in the country," says DLF’s
This brings us to the million dollar question. How safe are
real estate investments in India for absentee landlords? Jain of Kumar Builders
warns that while buyers should have an understanding of the pricing of the
project and the prevailing prices in the adjoining areas, "legal verification
and dealing with established and reputed developers is the essence." Adds Sastri
of IndiaProperties.com, "Clear titles and perfectly legal documents is a must.
Do not compromise even a bit." Magazine of CBRE suggests bringing in experts and
consultants to assist in the purchase, while V Nagarajan of Indian Real Estate
argues that tying up with housing finance companies could be the solution, "as
these companies do the due diligence study." G Nagarajan of Yogasri Property
says that in Karnataka for instance, laws require the builder to convert and
register the property in the company’s name before it is offered to buyers. He
also says that the developer should hold approval from the concerned government
agency for the building plan. "The room for hanky-panky is much less now.
Cheating does not happen so much, but still, buyers should take precautions and
do due diligence," says he.